My first niece was born a couple of months ago and it got me thinking about her education savings. There are a number of savings options my sister can employ for my niece in the 18 years before she starts post-secondary school. I outline the various sources, and the pros and cons of each option below.
For simplicity’s sake, I’ll assume that it’s the parent(s) saving for their child’s education, but many of these options can also apply if a grandparent or aunt or uncle is saving for the child’s education.
Using a taxable account to save for your child’s education can be as simple as using a high interest savings account or using a more complex non-registered investment account. Investment returns incur taxes, which can be high if you earn a substantial income from employment. The advantages of using a non-registered account for saving towards your child’s education is that there are no contribution or withdrawal limits. If your child doesn’t go to school, the money is in your name and you can decide what you want to do with it – give it to your child for other purposes (like starting up their own business, or purchasing a house) or keep it for yourself to pay for short-term goals or expenses, or save for long-term goals like retirement.
Parents can also set up an In-Trust account for their minor children. The money is legally the child’s and capital gains will be taxed in their names, but you can make investment decisions on their behalf. It’s important to ensure that the trust account is set up properly to avoid unintended tax consequences. When your child is no longer a minor, that money is theirs, and they have the legal right to access it and use it however they want.
Parents can use their own TFSA room to save longer-term for their child’s education. The TFSA has the flexibility around deposit timing and withdrawals. You can take as much as you want out in any given year. Similar to the non-registered investment account, money can also be used for other expenses if your child doesn’t pursue post-secondary education or doesn’t take a government approved course. Of course, the benefit of the TFSA is that you can invest the money tax-free. However, consider the opportunity cost of not being able to shelter your own savings from taxes and make sure using the TFSA for education fits into your overall financial strategy. One drawback to the TFSA is that you only have certain contribution limits, currently $5,500 per year. If you have multiple children, that limit might not be high compared to what needs to be put away towards their education costs.
Through the RESP, the government provides incentives of up to $7,200 for each beneficiary. In order to receive incentives, contributions have to start by the end of the year in which the child turns 15. Investments within the RESP can grow tax-free, and are ultimately taxed in the child’s name. The RESP can be a powerful tool for saving for your child’s education. The rules can be a bit complex, so I’ll outline them in a future post.
Finally, start to teach your children about saving money and encourage them to save up gifts, allowances, and part-time income at a young age so that they can put their own money towards their education down the road. They can save this in a simple bank account, get used to investment products like savings bonds, or you can set up an in-trust account and have them learn from an early age how investing works. You can also sock away government benefits you receive for your children, like the Canada Child Benefit, for their education.
Have you started saving money for your child’s education? Do you have any strategies I might have missed or questions about the ones above? Let me know in the comments below.
